NuZee, Inc. - Quarter Report: 2018 June (Form 10-Q)

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐   No ☒

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☐   No ☐

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of August 5, 2018, NuZee, Inc. had 37,974,173 shares of common stock outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

 

PART I.			4
Item 1.	Financial Statements.		4
	(a)	Consolidated Balance Sheets as at June 30, 2018 and September 30, 2017 (Unaudited).	4
	(b)	Consolidated Statements of Operations for the three and nine months ended June 30, 2018 and 2017 (Unaudited).	5
	(c)	Consolidated Statements of Comprehensive Loss for the three and nine months ended June 30, 2018 and 2017 (Unaudited).	6
	(d)	Consolidated Statements of Cash Flows for nine months ended June 30, 2018 and 2017 (Unaudited).	7
	(e)	Notes to Consolidated Financial Statements (Unaudited).	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		18
Item 4.	Controls and Procedures		18
PART II.			19
Item 1.	Legal Proceedings		19
Item 1A.	Risk Factors		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.	Defaults Upon Senior Securities		19
Item 4.	Mine Safety Disclosures		19
Item 5.	Other Information		19
Item 6.	Exhibits		20

 

 

 

 

 

 

 

 

 

 

 

 

This quarterly report contains "forward-looking" information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events.  Statements that are not purely historical may be forward-looking. You can identify these forward-looking statements by the use of words such as "anticipate," "believe," "estimate," "expect," "hope," "intend," "may," "project," "plan,"  "should," "outlook," "potential," continues," "future" and similar expressions, including when used in the negative.

 

Forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements, including but not limited to those described under "Risk Factors," in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, filed on February 21, 2018 as well as, among others, the following:

 

●     implementation of our operating and growth strategy;

●     our ability to obtain safety certifications;

●     competition;

●     our reliance on third parties for distribution and manufacturing;

●     our principal executive and financial officer is our sole director and owns approximately 39% of our stock ; and

●     availability, terms and employment of capital.

 

Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, such statements involve risks and uncertainties and no assurance can be given that the actual results will be consistent with these forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements as a result of various factors, including matters described in this quarterly report, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes thereto.

 

Except as otherwise required by federal securities laws, we do not undertake any obligation to publicly update, review or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 

Item 1.       Financial Statements.

 

NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
		June 30, 2018				September 30, 2017
ASSETS
Current assets:
Cash		$	615,568			$	347,327
Accounts receivable, net			140,548				143,893
Accounts receivable - Related party			603				12,380
Inventories, net			367,577				266,620
Other current assets			298,773				102,926
Other current assets - Related party			-				29,378
Total current assets			1,423,069				902,524
Property and equipment, net			575,068				277,987
Other assets:
Goodwill			17,112				17,112
Customer List, net			37,293				45,899
Investment in unconsolidated affiliate			-				10,733
Total other assets			54,405				73,744
Total assets		$	2,052,542			$	1,254,255
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	140,808			$	104,973
Loan payable - short term - Related party			-				200
Current portion of long-term loan payable			45,432				44,681
Other current liabilities			118,815				126,687
Other current liabilities - Related party			2,876				1,089
Deferred revenue			-				72,750
Total current liabilities			307,931				350,380
Non-current liabilities:
Loan payable - long term, net of current portion		$	101,816			$	133,644
Other noncurrent liabilities			9,771				9,610
Total non-current liabilities			111,587				143,254
Total liabilities			419,518				493,634
Stockholders' equity:
Common stock; 100,000,000 shares authorized, $0.00001 par value; 37,851,173 and 34,720,538 shares issued		$	378			$	347
Additional paid in capital			12,613,987				9,718,648
Accumulated deficit			(11,056,263	)			(9,030,551	)
Accumulated other comprehensive loss			(23,761	)			(20,680	)
Total NuZee, Inc. shareholders' equity			1,534,341				667,764
Noncontrolling interest			98,683				92,857
Total stockholders' equity			1,633,024				760,621
Total liabilities and stockholders' equity		$	2,052,542			$	1,254,255

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
		Three Months Ended June 30, 2018				Three Months Ended June 30, 2017				Nine Months Ended June 30, 2018				Nine Months Ended June 30, 2017
Revenues		$	271,317			$	268,262			$	1,018,849			$	1,222,096
Cost of sales			173,088				203,076				699,497				945,536
Gross Profit			98,229				65,186				319,352				276,560
Operating expenses			731,827				437,176				2,330,605				1,359,384
Loss from operations			(633,598	)			(371,990	)			(2,011,253	)			(1,082,824	)
Other income			7				8,426				9,058				39,386
Equity in loss of unconsolidated affiliate			-				(2,108	)			(10,733	)			(50,000	)
Other expense			(5,751	)			(1,337	)			(5,754	)			(5,237	)
Interest expense			(521	)			-				(2,000	)			-
Net loss			(639,863	)			(367,009	)			(2,020,682	)			(1,098,675	)
Net income (loss) attributable to noncontrolling interest			(6,124	)			(11,492	)			5,030				(26,340	)
Net loss attributable to NuZee, Inc.		$	(633,739	)		$	(355,517	)		$	(2,025,712	)		$	(1,072,335	)
Basic and diluted loss per common share		$	(0.02	)		$	(0.01	)		$	(0.06	)		$	(0.03	)
Basic and diluted weighted average number of common stock outstanding			37,330,769				32,744,196				36,305,238				31,539,132

 

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
										Noncontrolling
		NuZee, Inc.								Interests								Total
For the three months ended June 30		2018				2017				2018				2017				2018				2017
Net loss		$	(633,739	)		$	(355,517	)		$	(6,124	)		$	(11,492	)		$	(639,863	)		$	(367,009	)
Foreign currency translation			(12,786	)			(300	)			(3,364	)			(129	)			(16,150	)			(429	)
Total other comprehensive loss, net of tax			(12,786	)			(300	)			(3,364	)			(129	)			(16,150	)			(429	)
Comprehensive loss		$	(646,525	)		$	(355,817	)		$	(9,488	)		$	(11,621	)		$	(656,013	)		$	(367,438	)
										Noncontrolling
		NuZee, Inc.								Interests								Total
For the nine months ended June 30			2018				2017				2018				2017				2018				2017
Net income (loss)		$	(2,025,712	)		$	(1,072,335	)		$	5,030			$	(26,340	)		$	(2,020,682	)		$	(1,098,675	)
Foreign currency translation			(3,081	)			(19,911	)			796				(8,534	)			(2,285	)			(28,445	)
Total other comprehensive loss, net of tax			(3,081	)			(19,911	)			796				(8,534	)			(2,285	)			(28,445	)
Comprehensive loss		$	(2,028,793	)		$	(1,092,246	)		$	5,826			$	(34,874	)		$	(2,022,967	)		$	(1,127,120	)

 

 

 

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
		Nine Months Ended June 30, 2018				Nine Months Ended June 30, 2017
Operating activities:
Net loss		$	(2,020,682	)		$	(1,098,675	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and Amortization			103,587				55,883
Option expense			366,708				23,470
Interest expense			-				2,890
Inventory impairment			20,048				4,112
Allowance for sales return			4,438				-
Equity in loss of unconsolidated affiliate			10,733				50,000
Change in operating assets and liabilities:
Accounts receivable			1,020				16,036
Accounts receivable - Related party			11,985				-
Inventories			(119,119	)			59,693
Other current assets			(195,166	)			(6,640	)
Other current assets - Related party			29,871				-
Accounts payable			35,474				(160,000	)
Other current liabilities			(6,235	)			(21,705	)
Other current liabilities - Related party			1,768				-
Deferred revenue			(72,750	)			-
Net cash used by operating activities			(1,828,320	)			(1,074,936	)
Investing activities:
Purchase of equipment			(391,855	)			(136,333	)
Acquisition of investment in unconsolidated affiliate			-				(50,000	)
Net cash acquired from business acquisition			-				201,676
Net cash provided (used) by investing activities			(391,855	)			15,343
Financing activities:
Proceeds from issuance of Loan - short term - Related party			341,000				479,385
Repayment of loans - short term - Related party			(341,200	)			(322,824	)
Proceeds from issuance of Loan - short term			-				89,016
Repayment of loans - short term			(34,571	)			(26,046	)
Payments on capital lease			(2,683	)			-
Proceeds from issuance of common stock			2,528,662				680,510
Proceeds from issuance of treasury stock			-				315,318
Net cash provided by financing activities			2,491,208				1,215,359
Effect of foreign exchange on cash and cash equivalents			(2,792	)			(44,770	)
Net change in cash			268,241				110,996
Cash, beginning of period			347,327				40,613
Cash, end of period		$	615,568			$	151,609
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,082			$	2,063
Cash paid for taxes		$	800			$	800
Noncash investing and financing activities:
Acquisition of NuZee JAPAN Co., Ltd through issuance of common shares			-				258,465
Software purchased with installment agreement			-				14,807
Conversion of note payable			-				606,000
Conversion of note payable to common stock - Related party			-				100,000

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

NuZee, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

June 30, 2018

 

 

1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's annual report on Form 10-K for the year ended September 30, 2017 as filed with the SEC. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual report on Form 10-K have been omitted.

 

Principles of Consolidation

 

The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and majority owned subsidiaries which have a fiscal year end of September 30. All significant intercompany accounts, balances and transactions have been eliminated in the consolidation.

 

The Company consolidates its subsidiaries in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation.

 

NuZee JAPAN Co., Ltd ("NuZee JP") and NuZee Korea Ltd ("NuZee KR") are wholly owned subsidiaries.

 

Earnings per Share

 

Basic earnings per common share equal net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. The Company incurred a net loss for the three and nine months ended June 30, 2018 and 2017, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has had recurring losses, negative operating cash flows and is dependent on its shareholders to provide additional funding for operating expenses. These items raise substantial doubt as to the Company's ability to continue as a going concern.  The accompanying unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon management's ability to develop profitable operations, continued contributions from the Company's executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company's products and business.

 

 

Major Customers

 

In the nine months ended June 30, 2018 and 2017, revenue was primarily from major customers disclosed below. Besides those revenues, there were $37,558 and $0 account receivable owed by customer PO and customer B as of June 30, 2018, and $57,192 and $13,680 account receivable owed by customer PO and K as of June 30, 2017, respectively.

 

 

Lease

 

The Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line basis over the lease term.

 

NuZee JP is the lessee of certain equipment under a capital lease extending through 2020. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6-year life. The leased equipment is reported in the accompanying consolidated balance sheets in property and equipment of $8,973 as of June 30, 2018. The capital lease liability is included in other current liabilities on the consolidated balance sheets.

 

Future minimum lease payments under capital lease obligations as of June 30, 2018 for each of the remaining fiscal years are as follows:

 

 

The Company leases office space under leases expiring on May 31, 2020. Rent expense included in general and administrative expense for nine months ended June 30, 2018 and 2017 was $107,746 and $37,605 respectively.

 

 

Future minimum rents as of June 30, 2018 for each of the remaining fiscal years are as follows:

 

 

Loan

 

On June 30, 2016, NuZee JP entered into a loan agreement with Tono Shinyo Kinko Bank. The Company borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an annual interest rate of 1.2%. The loan is unsecured and guaranteed by a director. The Company had $81,323 loan payable at June 30, 2018. On January 27, 2017, NuZee JP entered into a loan agreement with Nihon Seisaku Kouko. The Company borrowed the sum of approximately $87,268 to be repaid on or before January 20, 2022 at an interest rate of 0.16%. The loan is unsecured and not guaranteed by a director. The Company had $65,925 loan payable at June 30, 2018. During the nine months ended June 30, 2018 and 2017, respectively, the Company paid back the principal amount of $34,571 and $26,046.

 

The loan payments required for the next five fiscal years are as follows:

 

 

Foreign Currency Translation

 

The financial position and results of operations of the Company's foreign subsidiary is measured using the foreign subsidiary's local currency as the functional currency. Revenues and expenses of such subsidiary has been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders' equity unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments comprising accumulated other comprehensive loss amounted to $23,761 and $20,680 as of June 30, 2018 and September 30, 2017, respectively.

 

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction loss and gain included in the consolidated statements of operations totaled $804 and $896 for the nine months ended June 30, 2018 and 2017, respectively.

 

 

Recent Accounting Pronouncements

 

In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance.  The new revenue recognition standard provides a unified model to determine when and how revenue is recognized.  The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations.  The collective guidance is effective for interim and annual periods in the first annual period beginning after December 15, 2017, with early adoption permitted.  The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  The Company has not selected a transition method and is currently evaluating the impact of the pending adoption of this ASU on its ongoing financial reporting.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The FASB has also issued related ASUs relevant to Topic 842. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the consolidated balance sheet.   The accounting applied by a lessor is largely unchanged from that applied under previous GAAP.  The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.  In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.  The Company is currently evaluating the impact of these amendments on its consolidated financial statements.

 

 

 

 

2.  GEOGRAPHIC CONCENTRATIONS

 

 

 

 

3.  RELATED PARTY TRANSACTIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.  INVESTMENT IN UNCONSOLIDATED AFFILIATE

 

 

 

 

5.  COMMON STOCK

 

During nine months ended June 30, 2018, the Company sold 1,341,783 shares of common stock at $0.51 per share, for an aggregate purchase price of $684,310, 1,511,352 shares of common stock at $1.00 per share, for an aggregate purchase price of $1,511,352 and 277,500 shares of common stock at $1.20 per share, for an aggregate purchase price of $333,000.

 

On October 3rd, 2016, the "Company" exchanged 1,148,734 shares of its common stock, par value $0.00001 per share, for seventy percent (70%) of the issued and outstanding common stock of NuZee JP. The Company's issued shares had an acquisition date fair value of $258,465.

 

During nine months ended June 30, 2017, the Company sold 680,510 shares of common stock at $1.00 per share, for an aggregate purchase price of $680,510 and 618,271 shares of treasury stock at $0.51 per share, for an aggregate purchase price of $315,318.

 

On March 31, 2017, Kenichi Miura exercised his right to convert the Amended Note to shares of the Corporation's common stock (the "Conversion"), at the price of $.51 per share, in accordance with the terms and conditions of the Convertible Note Purchase Agreement, thus equating to a conversion of $606,000 [i.e., $600,000 principal, plus $6,000 in accrued interest] to the equivalent 1,188,236 shares of the Corporation's common stock.

 

During May 2017, the Company agreed to amend Nagashima Takayuki's $100,000 short-term loan to a convertible loan with a conversion price of $0.51 per share. Nagashima Takayuki then converted this loan to 196,078 shares of the Company's common stock.

 

 

 

6.  STOCK OPTIONS

 

The following table summarizes stock option activity for nine months ended June 30, 2018:

 

 

The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expenses of $366,708 for nine months ended June 30, 2018. Unamortized option expense as of June 30, 2018, for all options outstanding amounted to approximately $585,547. These costs are expected to be recognized over a weighted-average period of 2.8 years. The Company recognized stock option expenses of $23,470 for nine months ended June 30, 2017.

 

A summary of the status of the Company's nonvested shares as of June 30, 2018, is presented below:

 

 

7.  SUBSEQUENT EVENTS

 

-Common Stock

 

During July to August 2018, the Company sold 50,000 shares of common stock at $1.00 per share, for an aggregate purchase price of $50,000 and 73,000 shares of common stock at $1.20 per share, for an aggregate purchase of $87,600.

 

 

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition.  The discussion should be read along with our financial statements and notes thereto.  This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance.  Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events.  You should not place undue certainty on these forward- looking statements.  These forward-looking statements are subject to certain risk s and uncertainties that could cause actual results to differ materially from our predictions. 

 

Plan of Operations

 

NuZee plans to continue building the market in the US for the single serve pour over coffee and the co-packing portion of the business. NuZee will continue building on current relationships and form new business relationships to package other brands and retail chains private label coffee. . We will continue to prospect new clients for co-manufacturing by attending many trade shows and continue following up with brands and companies that have expressed an interest of packing with NuZee.

 

◾  We have had many national brands visit our facility over the last quarter and have received feedback indicating that our anticipated growth for the single serve pour over is still on track to become a nationally recognized delivery method for coffee.

 

◾  We recently launched our Coffee Blenders line in the southwest Albertsons division which we believe will add a great deal of sales volume for the brand. We are supporting the launch with in store marketing as well as a regional online marketing campaign. 

 

◾  We have begun testing 2 eco-friendly materials with packaging and shelf stability testing that if implemented will bring a great advantage to our current customers and offer a compelling reason for brands and companies to co-pack their brand with NuZee. We are expecting to be through our testing in the next 3 months and are pushing for full commercialization by the end of 2018.

 

◾  We have completed our Safe Quality Food desk audit and physical audits in July 2018 and are expecting positive results and are hoping to have our SQF certification within 60 days. This is a crucial component for being able to do business with national brands and packing their products for them to go to market with.

 

◾  We are in the process of reassessing our Coffee Blenders cold brew program to search for partners that can provide us a longer shelf life as well as alternative packaging solutions to reduce our cost of goods and shipping costs. We hope to have a complete re-launch program completed and ready for deployment by the end of December 2018.

 

◾  We have leveraged our broker network to help us get Coffee Blenders placed into some of the strongest retailers in the United States as well as work hand-in-hand with KeHE and UNFI, two of the largest organic natural distributers in the US. We will keep investing in expanding our broker network to strengthen our reach into the US grocery segment.

 

◾  We have completed our marketing materials with a videography company who is curating compelling videos for product education, customer sales, & social media and marketing efforts.

 

◾  We have invested into a wholly owned subsidiary in Korea.  NuZee Korea will be a production facility and will sell Coffee Blenders product.

 

 

We plan on continuing to scale our sales staff to meet the demands of our growing network of co-packing customers and have plans in place to accommodate some of the larger national brands who have inquired about NuZee's co-packing solutions and are ready to expand as our business grows.

 

Long Term Goals (Five Years)

 

The long-term goals for NuZee, Inc. are to position NuZee as the leader in the drip cup co-packing business and capture a large market share from the closest competing product in the coffee segment, the single serve K-Cup. We will broaden our ability to bring on national customers by increasing our production capacity and adding a new production facility. We will expand our international presence throughout Asia-Pacific and work to have the most successful cold brew extraction & packaging plant in the US. Offering both the Drip Cup packing and cold brew extraction will help drive to increase our revenues. NuZee will continue to innovate in terms of packaging solutions and strive to innovate our raw materials programs to ensure that we are offering the most advanced packaging in the industry. We plan to expand our footprint in Texas to continue to accommodate national customers and meet the needs and demands of our customers and partners.

 

The Company believes that our limited resources may pose a challenge to our expansion goals and therefore anticipates that it may require additional capital in future years to fund expansion. There can be no assurance that our expansion strategy will be accretive to our earnings within a reasonable period of time. However, the Company believes that it can improve its operational efficiencies and reduce the need for new capital by carefully managing the business based on the following economic fundamentals within accretive margin and cost contribution modeling.

 

Results of Operations 

 

 

Revenue. For the three months ended June 30, 2018, our revenue increased by 1% compared with the same time period in 2017. The contributing factors for this minimal increase was the decline in volume of sales through our Direct Sales Distribution channel. For the nine months ended June 30, 2018, our revenue decreased by 17% compared with the nine months ended June 30, 2017.  The contributing factor for this decrease was the slower sales to our distributors.

 

Gross Profit. For the three months ended June 30, 2018, we earned a total gross profit of $98,229 from sales of our products and co-packing services.  The margin rate was 36% for the three months ended June 20, 2018, and 24% for the three months ended June 30, 2017. This increase in margin is driven by lower material costs.  For the nine months ended June 30, 2018 the gross profit of $319,352 contributing factor was a lower Cost of sales driving a margin of 31% compared to the nine months ended June 30, 2017 margin of 23%.

 

Expenses. For the three months ended June 30, 2018, our Company's operating expenses totaled $731,827 which is a reflection of an 102% increase in travel expenses, 300% in professional fees and 135% in legal.  The increase over the same period of the prior year in travel primarily due to meeting with current and new investors. The increase in professional fees was driven by Legal - SEC support. For the nine months ended June 30, 2018, our Company's operating expenses totaled $2,330,605 compared to the nine months ended June 30, 2017 $1,359,384.  Contributing factors were a 122% increase in Professional fees and a 80% increase in legal fees.

 

Net Loss.  For the three months ended June 30, 2018, we generated net losses of $639,863. This loss was attributed to operating expenses. Attributing factors were insurance expenses, Legal - SEC and consulting services. For the nine months ended June 30, 2018, we generated net losses of $2,020,682.  There was a 84% increase in losses from the nine months ended June 30, 2017 compared to the nine months ended June 30, 2018.  Contributing activity towards the $922,007 increase was in professional fees relating to consulting support for in foreign investor relations, increased production equipment amortization and new facility production buildout.

 

Liquidity and Capital Resources

 

As of September 30, 2017, we had a cash balance of $347,327 and $615,568 as of June 30, 2018; this increase was primarily due to the sale of common stock.

 

Accounts receivable is flat and inventories increased about 38% since September 30, 2017.  Inventories increase in preparation of known orders coming in Q4.

 

 

Our current ratio of 4.6 as of June 30, 2018 reflects an increase in working capital compared to 2.6 as of September 30, 2017.

 

Our auditor has indicated that there is substantial doubt about our ability to continue as a going concern due to our lack of significant revenues, recurring losses from operations, negative cash flow and if we are unable to generate significant revenue or secure financing, we may be required to cease or curtail our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Our current cash balance as of June 30, 2018, is not sufficient to fund our operations for the next twelve months. Therefore, the Company intends to engage in additional financing through the sale of equity securities.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4.  Controls and Procedures

 

As of the end of the period covered by this Report, the Company's President, and principal financial officer (the "Certifying Officer"), evaluated the effectiveness of the Company's "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the officer concluded that, as of the date of the evaluation, the Company's disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the Company's periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management to allow timely decisions regarding required disclosure.

 

Our management, including the Certifying Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control Over Financial Reporting

 

The Certifying Officer has also indicated that there were no changes in internal controls over financial reporting during the Company's last fiscal quarter, and no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Item 1.       Legal Proceedings

 

None.

 

 

 

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended June 30, 2018, we sold 451,352 shares of common stock at $1.00 per share, for an aggregate purchase price of $451,352 and 277,500 shares of common stock at $1.20 per share, for an aggregate purchase price of $333,000. These proceeds will be used for general business operations.

 

All the investors were non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933, as amended) who purchased in transactions outside of the United States.  In issuing shares to those investors, we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 3.       Defaults Upon Senior Securities

 

None.

 

Item 4.       Mine Safety Disclosures

 

Not applicable.

 

Item 5.       Other Information

 

On August 10, 2018, we terminated the Commercial Contract – Improved Property (the "Agreement") for the purchase of a building located in Fort Worth, Texas that we entered on June 27, 2018.  Details of the Agreement were reported in our Current Report on Form 8-K filed on July 10, 2018.  We expect that all but $100.00 of our deposit will be returned.

 

Item 6.       Exhibits

 

EXHIBIT NO.		DESCRIPTION
31.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101**		Interactive Data Files
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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